S&P Downgrades U.S. Credit Rating: What's Happening Right Now With Your Money

Aired August 7, 2011 - 15:00 ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

ALI VELSHI, HOST: S&P has downgraded America's AAA credit rating. No matter where you turn in this economy - your job, your savings - only one thing seems to be clear - America is facing an uncertain economic future.

Welcome to a special live edition of YOUR MONEY. I'm Ali Velshi.

This next hour is dedicated to setting aside the panic and giving you a straightforward look at what is happening right now with your money.

Let's start with Ken Rogoff. He's a former chief economist for the International Monetary Fund. He's a professor at Harvard University. Christine Romans is the host of "YOUR BOTTOM LINE." And Chrystia Freeland, joining us momentarily, is an editor at Thomson Reuters Digital.

Ken (INAUDIBLE) Ken, let's start with you. Tell us what this means. S&P said it may downgrade the United States, and it did it. It took us from AAA to AA-plus. What does that mean?

KEN ROGOFF, FMR. CHIEF ECONOMIST, IMF: Well, it's a huge thing. This hasn't happened in the history of the United States. We've defaulted maybe in 1933, but you know, since they started having the rating agencies, this hasn't happened. And it's pretty shocking.

So my concern is not so much the professional investors, but what about the man on the street? Are they going to panic about this? Is there going to be some broader effect that we don't expect?

VELSHI: And what do you think about that? What do you think? Because it's hard to make that connection. It's hard to tell people who are watching us right now that your credit card rates are definitely going up or your mortgage rates are definitely going up. We're not entirely certain what's going to happen, are we.

ROGOFF: No. No, no. Absolutely not. Right now, with what's happening with the stock market, AA-plus looks pretty good. I mean, people still want to be in Treasuries. I don't think they're going to necessarily be rushing into the stock market and out of Treasuries because of this. But it definitely -- as (ph) this thing plays out, the U.S. government has been the line in the sand. They've been the one who put their foot down and say, We're going to back the banks, you can be sure of your bank account, you can be sure of our credit.

And look, this isn't the end of the world. It's AA-plus. That's still a really high grade. But it's disconcerting in the middle of the crisis as it's deepening.

VELSHI: The full faith and credit, Christine, of the U.S. government -- it's an expression that's been used forever. It's not that this was entirely unexpected. I almost think what was unexpected was the reaction out of Washington from all sides last night. Everybody was looking for someone to blame. And no one looked inward and said, What do we do to fix this to get back on top.

CHRISTINE ROMANS, HOST, CNN'S "YOUR BOTTOM LINE": You know, I think you could have had a big rally in the stock market on Monday if you had had the president and you had leaders of both parties in Congress and all of the presidential candidates from the GOP all come out and say, We hear you. We're going to get our problems under control. We have now -- we are now looking beyond politics and our individual ideologies and we're going to get this fixed. We're going to cut more in a very strategic and thoughtful way. America is still the economic superpower. We're going to act like it.

Now, that's obviously pretty Pollyanna, right, of me to think that. But I'm telling you that they all reverted back to what S&P was complaining about in the first place, acrimony that leads global investors and people like S&P to think the U.S. doesn't have its act together enough politically to be able to deserve a AA and to be able to get some pretty significant fiscal problems in order.

So you have really, I think, Ali, an extension of the behavior that got us here. It's continuing right now. I'm worried about treacherous markets and politics until December 23rd, when that super- committee has to agree on another $1.5 trillion in cuts, Ali.

VELSHI: Chrystia, let's talk about this for a second. We really have two things that could have gotten us here. One is real budgetary problems, which we've got in the United States, and frankly, we've got in much of the developing (SIC) world. And then we've got this concern that S&P outlined, and that is that a AAA-rated country, the best-rated countries in the world should be separating their budget process, which is very important, from their debt authorization process, the actual discussion about paying their bills.

And S&P seemed concerned with that very behavior that Christine is talking about.

CHRYSTIA FREELAND, EDITOR, THOMSON REUTERS DIGITAL: Yes. You're absolutely right, Ali. I mean, S&P pointed to two things. One of them was this really unusual structural element of how the U.S. works -- I think that Denmark is the only other Western industrialized country that works this way -- where the people who -- the process whereby you decide your budget, how much you're going to spend, and therefore how much you're going to tax and how much you will borrow, is separate from the process where you authorize how much the country is allowed to borrow.

And that's why we had these debt ceiling antics over the summer, which were really actually structurally institutionally separate from the actual decisions about the budget. I think the S&P quite rightly said, You know, this is no way to run a country. And this means that the United States is set up for repetitions of the battle that we just had, which was really -- you know, it was a political "own goal."

We didn't have a situation in the United States, which countries often face when they're running into fiscal problems, that it's the market saying, Come on, guys, get your act together, otherwise you're in trouble. The problems of this summer were a political own goal. They were structurally created. And that's something, Ali, that I think the S&P pointed to as saying, you know, this is a weakness going forward.

VELSHI: I want to ask you, Ken -- we're going to speak to Mohamed El- Erian of PIMCO a little later on in the show. One of the issues here is that there are other AAA-rated countries in the world. There are countries where you can get more money -- more higher interest for lending that country money than you can the United States. But frankly, they don't have enough debt lying around there to really replace the United States as this safe bet.

Do you think the United States today is a riskier bet than it was yesterday? And by the way, that's that list of countries that are rated AAA by Moody's and S&P. You can see the United States no longer on that list. What do you think, Ken?

ROGOFF: Well, I think what happened over the summer was pretty frightening. And our Constitution -- we look like the Italian parliament. I mean, that's how countries get into trouble because they can't govern themselves properly. So we look riskier from that.

But also, Ali, the data's gotten worse. We're slipping back into slower growth. People were counting on fast growth to just sort of get our way out of this. And then, well, your political system doesn't work perfectly, it doesn't matter.

So it is riskier because difficult decisions need to be made. We are not going to get out of this quickly. The stock market's fallen dramatically. The economy's slowed. There are some tough decisions, and it could affect inflation, for example, which is something S&P takes into account. If there's going to be high inflation that makes your bonds worth less, that counts, too. So it does feel riskier. There's no doubt about that.

VELSHI: All right, we have two very specific issues that we have to deal with, growth in this country, getting it back on track, and getting this AAA rating back. How are we going to do that? How do we get growth in this country? We've got some solutions.

I want to take a quick break. We're going to come back with this fantastic panel and we're going to discuss how we actually get solutions, how we get back on track economically and how we get our AAA rating back.

You're watching a special live edition of YOUR MONEY right here on CNN.

(COMMERCIAL BREAK)

VELSHI: OK, late yesterday, we had a downgrade by the S&P of the U.S. credit rating, the sovereign debt of the United States, which has been AAA since 1917, since it was first rated by Moody's. Now, Moody's and Fitch, the other two big rating agencies, are keeping the U.S. at its AAA rating. S&P has downgraded it.

Now, here's something to consider. There are four companies in the United States that have a AAA rating. Those four companies are -- where are they? -- ADP -- Automated Data Processing -- Johnson & Johnson, ExxonMobil and Microsoft. And some have wondered what happens to those companies. Can a company have a higher credit rating than the country in which it exists?

I asked S&P's John Branch (SIC) -- he's the head of sovereign debt rating for S&P -- about how this affects those companies and your mutual funds or your pension funds, if they invest in those companies. Here's what he told me.

(BEGIN VIDEOTAPE)

JOHN CHAMBERS, STANDARD & POOR'S MANAGING DIRECTOR: The U.S. corporations, I think there are four of them --

VELSHI: Yes.

CHAMBERS: -- they are not affected by this directly. In terms of other people who might be -- have portfolios that have AAA restrictions, and the U.S. being downgraded, will that have an impact on them -- we've spoken to a number of investors about that. They think that the impact will be pretty minimal. They don't think that there'll be massive forced selling because of this.

(END VIDEOTAPE)

VELSHI: Christine Romans joins me now.

Christine, markets will open again, Asian markets will open 8:00 PM Eastern time on Sunday night, and we'll have our markets on Monday. What a week we've had. A lot of people, a lot of our viewers out there would like to know what this means for investors when markets open on Sunday night and Monday. What do you think?

ROMANS: It's absolutely impossible to know, to be really honest with you, because you might ironically have huge safe haven buying into the Treasury market, pushing yields even lower. So you're hearing a lot of people talk about how higher interest rates are coming, it is inevitable. That could be a long time off if, indeed, you still have the U.S., the biggest, most liquid debt market in the world -- that's where everybody wants to go.

You know, I've learned a long time ago, Ali, 15 years of covering crises, that you do not predict how the stock market's going to react. Remember, the stock market is half the size of the bond market. Currency markets are huge, as well. We'll be looking for all -- commodities markets -- all of these interact. And we won't know until Sunday night.

Now, one thing I can tell you is that our biggest investor is out there scorning and chastising us, our biggest foreign investor, I should say, China, a commentary on Xinhua -- it's a news agency -- saying that the United States -- scorning it for its debt addiction, for short-sighted political wrangling and warning us that the good old days of borrowing in America are over, using it as a new reason to call for a global reserve currency that is not the U.S. dollar, Ali.

So a little bit of political tension there, not necessarily that surprising. But remember, China is the biggest foreign investor of U.S. Treasuries, Ali.

VELSHI: You know, Ken, Christine makes a very interesting point here, and that is the U.S. Treasuries continue to be a safe haven. In other words, for all the turmoil that's going on out there and for all the risky markets in the world, whether you want to buy their bonds or stocks, U.S. Treasuries, even downgraded, might still be a better bet, and you might actually see yields or interest rates going down, as opposed to up. Do you think that's possible?

ROGOFF: That's absolutely possible, Ali. I mean, where are you going to go? It's not easy to know right now where to put your money. The stock market is very volatile. Are you going to go to Europe with your money? That's very volatile. There's only so much gold, and that's very -- has lots of its own risk. You certainly -- the Chinese going to put their money in China all of a sudden, instead of the United States?

I don't think there'll be a dramatic effect. But this is a very fragile moment. There's a lot of emotion. There's a lot of tension. And the biggest crisis right now, the biggest crisis is in the leadership in Europe, in the United States, and the public is losing confidence. This underscores it. And that's going to make it harder to do the right things and to contain the problems, which we're going to have one way or the other.

VELSHI: Chrystia, Christine had said earlier, you know, the only way you might get rally, a really clear rally on Monday, is if everybody involved in the political bickering were to come together and say, Wow, this is serious, this is a real message, let's get it together and let's figure out how we get our AAA credit rating back. And she's actually getting a lot of tweets. Christine is getting tweets.

Chrystia, I want to ask you, what do you think about that? I think Christine and Ken are both agreeing leadership is as much of a problem here as budget deficits are.

FREELAND: I think that's absolutely right. And what was really interesting about the S&P rationale is, actually, they pointed much more to political issues, really, than underlying economic ones. I think at heart, this decision by them was really a political -- a verdict on dysfunctional politics as much as it was on a fiscal situation which needs to be resolved.

What I think, though, is worrying and the reason why the scenario that Christine painted very eloquently, alas, I think is highly unlikely, is that we are already seeing in the reaction this morning and on Friday night that the really big ideological divide remains. So you've had Democrats pointing very strongly to S&P's point about revenue and the S&P saying, You know what? If you'd just let those Bush tax cuts lapse, that would be a very big step towards a solution.

Meanwhile, you've had the Republicans pointing to the idea that, Look, the S&P is saying that the budget deficit is the core problem. That's what we've been saying. We've been right. All those Democrats who are talking about job creation, maybe more stimulus, focusing on growth, they're wrong.

So it seems to me that the ideological divide -- and I think this is really about ideology, it's not just about rhetoric -- remains, and it's a very deep one in America today.

VELSHI: All right, Ken, stick around. We're going to be listening to Mohamed El-Erian from PIMCO a little later on. They're very involved in bonds. We'll come back to Ken Rogoff. Chrystia, thanks so much for that great analysis. Christine, I think you should start a campaign for people to get their elected officials to come together on this one and try and fix it up.

One of the biggest concerns out there is jobs. There are actually sectors that are hiring. We're going to tell you which employers are looking to hire next on YOUR MONEY.

(COMMERCIAL BREAK)

VELSHI: The U.S. economy added a better-than-expected 117,000 jobs in July. We're going to give you some sectors that are hiring and tell you where those jobs are. Ted Gilliam is the CEO of Adecco. If anybody knows what jobs are in demand, it is this man. He heads the world's biggest temporary placement firm and -- and recruiting firm. Tig (ph), who is hiring right now?

TED GILLIAM, CEO ADECCO: We got hiring in manufacturing, in retail. The retail one, frankly, is a bit of a surprise, given the level of consumer confidence. So I think that's a very good sign. And then, of course, in health care. Health care has carried us through the recession, and we saw another month of strong job growth in health care.

VELSHI: This is an industry, health care, we've seen an average of 24,000 jobs a month created in this. Do you -- do you work in that part of the business, your company place people in health care? Where are you seeing the jobs?

GILLIAM: -- pharmacists, all kinds of skills categories in the health care sector. It's been a very turbulent sector, but it's been a growing sector over the course of this recession.

VELSHI: Help me out understanding the role of temporary job hiring in a recovery. Typically, in past recessions, we used to see the recession end and you'd see temporary job hiring until companies decided what to do and what kind of staffing levels they want, and then they would translate into permanent jobs. Is that still the case?

GILLIAM: Well, there is this normal recessionary and recovery process that occurs in temp, where employers come back in the marketplace, they need resources, but they want flexibility. And they do that by employing temp and contract workers first.

I think that's part of the recovery. But also, we're seeing more of a fundamental change. This recession was so tough, companies are very much more focused on flexibility going forward. And I think they're going to look increasingly for flexible working environments in the economy as we get this recovery going.

VELSHI: Tig, you get paid by companies that want you to find workers for them. So you talk to the CEOs of companies that are hiring or potentially hiring. We keep discussing endlessly what companies need to hear or see or experience from the government in order to hire. What is it?

GILLIAM: Well, first and foremost, companies that are hiring are those that see good prospects for their business in the near term and have already reached the level of capacity that they have with their current workforce. The best place to be from a skill set perspective is in IT, engineering and finance. Those are by far the strongest skill sets, and it's the area where the labor supply is the thinnest.

VELSHI: OK.

GILLIAM: So we're really looking at more like a 4 percent unemployment rate in those skill sets, as opposed to the 9.1 average.

VELSHI: Let's talk about the skills that workers come in with, the workers that you place in these jobs. What do you see -- if somebody's watching this saying, I'm ready to make a switch into something, what would you tell them they should do?

GILLIAM: Well, I'd go back to those professional skill categories as the best sectors to focus on if you're looking at building your education. In terms of the job search, most of the permanent jobs that are being added today are coming from temporary and contract assignments. So what I'd say is, in your search process, don't be afraid to step out and engage on a temporary contract basis. Use that as an opportunity to prove your skills and prove the value you can bring to the organization. And that can very well be the best path to a new permanent job.

VELSHI: Explain that to me a little bit more. If I'm coming to CNN and there's a staff job there, or maybe there isn't, and I'm applying for it, they maybe are not sure they want to hire me or the work's not fully there. How do I then become a contract worker?

GILLIAM: Well, in many cases, you can just make the offer. A candidate is say, Look, I know you're looking for a permanent position, and that's great. If there's a permanent position, I'd like that. However, if you're uncertain about making that decision today, I'm happy to work with you on a contract basis for the next six months, and we'll get to know each other and get a chance to work together. And we're finding that's a good strategy to use.

And in fact, we have many of our clients coming to us and say, Look, I need some resources, but I don't want to go the permanent route yet. Can you get me someone that can work with me for the next six months, and let's see how it goes? And that's a great avenue to pursue.

VELSHI: Let's talk a little bit about the difference between the behavior of large companies and small businesses in the U.S. with respect to hiring right now.

GILLIAM: This is a great point, Ali. What happens in the U.S., we have about 2 percent of the companies that are large companies that hire half the workforce. Ninety-eight percent of the companies in the U.S. have less than 1,000 employees, and they hire the other half of the U.S. workforce. The job growth we've seen so far in this recovery has been with the large companies. And this is where I think we come back to public policy and some incentives to really help those small and mid-sized companies get back in hiring mode and to hire here locally in the U.S.

VELSHI: Tig, all we hear about and read about is people saying what we have to do about the jobs and where the jobs are. You actually know it. Such a pleasure to get all this granular information from you. Tig Gilliam is the CEO of Adecco.

All right, we've got a debt ceiling deal, now we can deal with our real economic problems. Can Congress and the president still be part of the solution?

(COMMERCIAL BREAK)

VELSHI: The future of our economic recovery is clearly uncertain. One day we see the Dow down more than 500 points. The next day, we get a better-than-expected jobs report. What does this all mean?

Nobel Prize-winning economist Paul Krugman wrote in an op-ed in "The New York Times," quote, "Those plunging interest rates and stock prices say that the markets aren't worried about either U.S. solvency or inflation, they're worried about U.S. lack of growth."

When Krugman refers to a lack of growth, let me show you what he is talking about. GDP growth -- that's how we measure. It's the biggest measure of the economy. Well, we found out just over a week ago that GDP growth -- look over on the side of your screen, on the right side -- for this quarter -- for the second quarter of the year was 1.3 percent. That's lower than we expected. Look at the first quarter, 0.4 percent. Those bar graphs should be getting bigger every quarter, not getting smaller and not dodging around. That's the problem.

Diane Swonk is the chief economist at Mesirow Financial. Diane, let's talk about what has to happen to spur meaningful economic growth in the United States. Can you create economic growth with policies, for instance?

DIANE SWONK, CHIEF ECONOMIST, MESIROW FINANCIAL: Well, we've certainly seen if there was any silver bullet to shoot on that front, it would have been shot already. And so there is no silver bullet. In the wake of the financial crisis, we shot a lot of bullets, and we've stemmed the hemorrhaging that the economy went through during the recession, but we've been unable to really get momentum going. That's very characteristic of a post-crisis kind of recovery, and that's what we're in. It's one thing to know that that's coming, it's another thing to live it because living it has been absolutely miserable.

VELSHI: No kidding. And then this last week, Diane, we started to feel things that we had felt three years ago, and I don't think any of us needed to relive that. We don't need these -- these big shocks.

Stephen Moore is the editorial writer for "The Wall Street Journal." Stephen, we saw the Bush tax cuts extended in December of 2010. Generally speaking, taxes remain low. But this recovery is not taking hold. Why do some argue that lowering taxes, thereby reducing government revenue, would actually boost the economy?

STEPHEN MOORE, EDITORIAL WRITER, "WALL STREET JOURNAL": Well, first of all, Ali, the reason that tax revenues are so low right now -- and you're right, you know, we are only getting about 15 percent of GDP in taxes and we're spending 24 percent of GDP. So that's the big deficit gap.

The main reason that we're seeing that drought in revenues is because the economy is not growing. And it's strange, Ali, because I find myself in some agreement with Paul Krugman. The problem right now is growth. The economy isn't growing. We're not generating jobs. And Ali, if people aren't working, they don't pay taxes, right? And so we do need to get to a growth program. It's just that Paul Krugman and I probably couldn't disagree more about what to do about it.

VELSHI: About how you get there.

MOORE: Let me just say one last thing.

VELSHI: Yes.

MOORE: If you read my column in Friday's "Wall Street Journal," what I talk about is, you know, the time might be right for a grand deal to do a tax reform that lowers tax rates, broadens the base, gets rid of all the pollution in the tax system. I think that's something that could generate --

VELSHI: I'll tell you, I did read it. I read it very early on Friday morning. And I thought to myself, I'm not really going to bring up the topic of Congress getting a grand deal on tax reform on this show, because my viewer will click the remote. And say, that knucklehead is a knucklehead. Do you think it's possible?

MOORE: I really do. You know, what because if you read the column you'll see, in 1986, everybody said it couldn't be done. You can't take on the special interest groups. One of the points I make, Ali, that you'll like is this is the way for Barack Obama to save his presidency.

VELSHI: It's possible.

MOORE: I really believe so.

VELSHI: I think the left and the right both agree on the fact that -- I don't know what reform we all want, but that reform in taxes is necessary. The debt ceiling deal meant that a potential crisis was averted. But there was optimism that it could mean a lot more than that. Listen.

(BEGIN VIDEO CLIP)

BARACK OBAMA, PRESIDENT OF THE UNITED STATES: The sooner we get this done, the sooner that the markets know that the debt limit ceiling will have been raised and that we have a serious plan to deal with our debt and deficit, the sooner that we give our businesses the certainty they will need in order to make additional investments to grow and to hire.

(END VIDEO CLIP)

VELSHI: Interesting. So the president back on July 8th, by the way, a month ago, was arguing that closing this deal will give more certainty to businesses and allow them to start hiring.

Norm Ornstein is a resident scholar at the American Enterprise Institute.

Norm, the celebration over the debt ceiling was remarkably short- lived, at least as far as markets were concerned. What policy tools do Congress and the president have left to spur this economy notwithstanding what Peter suggested, a grand deal on tax reform. What else do they have?

NORM ORNSTEIN, RESIDENT SCHOLAR, AEI: It was more like a wake. I'm afraid one part of the disappointment in the deal was that some of the tools that were there, pitifully weak ones. But, for example extending the payroll tax cuts, or maybe including an infrastructure bank, that could be funded without necessarily using many federal dollars, simply weren't a part of this deal. I continue to be worried that even though the spending cuts are going to be relatively limited in this next year, this is just not a time to be doing that. So you hope that when we get beyond this phase in August and Congress comes back, they'll start to focus more on some of the limited things that government can do. And that does include moving towards, in this super committee, possibly a grand bargain that includes tax reform. But you'd have to be a super optimist to believe that we'll move rapidly in that direction.

VELSHI: Let's ask Diane. You started by saying if there were a silver bullet, it would have been shot at this point. There are two things that come up constantly. Norm just mentioned-well, it is three. Let's take tax cuts. Norm just mentioned payroll tax cut. And the third one is this QE2 that sometimes gets talked about, the idea of more quantitative easing. The Federal Reserve putting lots and lots of money into the economy to stimulate it. Give me your evaluation as an economist.

DIANE SWONK, CHIEF ECONOMIST, MESIROW FINANCIAL: Well, all those issues that we've just talked about are valid issues. I do think we probably will get an extension in the payroll tax cut in 2012. It's just a very bad time not to do that.

But that's on the margin, as Norm mentioned. I mean, these are all marginal tools. I do agree with Steve that tax reform, fundamental tax reform, in the longer haul could get us to a better, more competitive plain in terms of dealing with both our deficit and our competiveness globally. That said, I am not the super optimist. I listen to Norm a lot. And I believe him and think highly of him. And I'm disappointed, more than disappointed, with our ability to come up with these.

I do also think it is really important to think about-you know, in terms of the Federal Reserve, this is putting a lot of weight on the shoulders of central banks around the world.

VELSHI: Sure.

SWONK: The European Central Bank, disappointed this week by buying-

VELSHI: And look what happened.

SWONK: Italian bonds. And look what happened, exactly. That helped to trigger the major losses we saw in the market this week. And the reality is that we're running out of tool kits. I think the Fed can do more. And I think they're going to be considering it. Certainly the employment report we saw on Friday helps take some of the burden off the Fed for doing something immediately and a too knee-jerk reaction. But any way you cut it, the Fed, if the European Central Bank, the Fed will likely be pulled into the picture in one way or the other, maybe not QE3. But they will be pulled into the picture because what happens in Europe matters to us in the U.S. And they have to also keep those swap lines open and all these different things we used during the crisis. The weight is still on the shoulders of the central bank to carry this economy. And it's a heavy burden to carry.

MOORE: You know what, I'll say this, Diane, if we have a QE3-and I think now there's a real chance of that, given the possibility --

SWONK: There is a chance, yes.

MOORE: --how they doubled debt.

Ali, this is a money show. I'm buying gold if that's going to happen because, look, you don't create prosperity by printing money.

VELSHI: Right.

MOORE: We've seen the gold price go from $900 an ounce in January of 2009 to what is it, $1,650 or so, today? We could easily see a $2,000 gold price because people around the world are losing confidence in paper currency, whether it's the euro or the dollar. These politicians thinking they can create growth by printing money.

VELSHI: You saw it at the end of the week, gold had even lost a bit of ground.

(CROSS TALK)

VELSHI: Diane hold that thought for a second. We need to pay our bills here at CNN. We'll take a quick break. We'll be right back.

(COMMERCIAL BREAK)

VELSHI: We're covering live here on YOUR MONEY the downgrade by S&P of the U.S. sovereign debt. I'm joined now by David Beers. He is the global head of sovereign ratings with S&P. Christine Romans is with me as well.

David, good to see you. Thank you for joining us.

Tell us, please, for our audience, with a little bit of time between when this happened and now, why Standard & Poor's made the decision to downgrade the United States from its AAA credit rating?

DAVID BEERS, GLOBAL HEAD OF SOVEREIGN RATINGS, STANDARD & POOR'S: Sure. Two key reasons, the first is around the uncertainty that we think the political process, as it's playing out, on fiscal policy is creating in the U.S., and the uncertainties about the future direction of fiscal policy. And that's about the difficulty of creating a consensus across the political spectrum about making fiscal policy choices.

And the second factor, of course, relates to the agreement that Congress and the administration signed into law earlier this week. We think that the-uh, that package which will either be between $2.1 trillion and $2.4 trillion, on its own, will not do enough to stabilize the rising debt burden of the U.S. government.

VELSHI: David, tell me about this discussion that's been going on where the administration says that it pointed out what it calls an error to Standard & Poor's in some calculations. And that S&P said it would go back and look at it and ultimately still made the decision to downgrade the United States. Can you give us some context around that?

BEERS: Sure. This is about technical assumptions that the CBO, the Congressional Budget Office, uses in looking at, in its own nonpartisan way, medium-term and long-term fiscal trends in the United States. And they have two sort of baseline sets of assumptions. We were looking at one set of assumptions. We talked to Treasury. And agreed with Treasury that another technical approach of looking at it made sense and we adjusted our projections on that basis, ran it by our rating committee, and concluded that the rating should be cut on the basis of those revised assumptions.

VELSHI: So you take issue with the fact that it's an error?

BEERS: Well, these are assumptions, these are projections going long into the future. And there are different ways that reasonable people can look at them. And so this was a set of technical issues. It's not a question of who's right or wrong here.

CHRISTINE ROMANS, CNN ANCHOR, YOUR BOTTOM LINE: The issue here -- and thanks for joining us this afternoon-the issue here really for you, then, is that even though in the United States we see this big, huge debt ceiling deal, and many people feel like, OK, now finally they've put this behind us. It is not behind us. The national debt continues to grow. Deficits are too big, too big as a size of the American economy, and with the slow growth that we're seeing taken together, that makes the U.S. a slightly riskier investment than it was six months ago. Is that a correct assumption?

BEERS: Yes. And I just want to highlight again the fact that by our lights, the political process, as it comes to grips with the fiscal policy issues, we think in and of itself creates a bit of -- a lot of uncertainty, which we think itself is an issue in terms of the rating of the U.S. government.

VELSHI: David, I want to ask you this one last thing. When do you think-or what would the U.S. have to do to regain its AAA credit rating? Do you have any guidance on that?

BEERS: Well, remember where we are right now. We've lowered the rating one notch to AA-plus. Still a quite high rating, of course, but we have a negative outlook on that rating, which means that in our opinion, the rating could fall again at some time over the next two years depending upon whether there are additional fiscal measures, and how actually the package agreed to this week actually plays out. So at the moment, we uh, our best case scenario doesn't foresee over the next couple of years the U.S. getting back to AAA. But we suppose that if it did --

ROMANS: Do we need

(CROSS TALK)

BEERS: Sorry?

ROMANS: Do we need see-

BEERS: Can I just finish?

ROMANS: -tax increases or taxes on the table -- Sure, sure, go ahead.

BEERS: Can I respond to you question. We think there are two issues here. One is bridging the political divide, whether it's -- and whatever that looks like in terms of the mix of revenues and expenditures, that's where Congress and the administration need to decide. But if we thought, it we had more confidence than we have now that there was going to be a durable political consensus about the choices around fiscal policy, that would give us more confidence about the ability of the government to stabilize the debt burden over the medium term. If those two things happen, yeah, there's a chance sometime in the future the U.S. can go back to AAA.

VELSHI: David, thanks for joining me. Appreciate it. We'll continue to follow this story. David Beers is the global head of sovereign ratings for Standard & Poor's. And my colleague Christine Romans.

When we come back, we're going to talk to Ken Rogoff, former head of the International Monetary Fund-former chief economist for the International Monetary fund, and Mohamed El-Erian, probably one of the most important bond men in the world. You are watching a special live edition of YOUR MONEY.

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VELSHI: Back with a special live edition of YOUR MONEY, covering the S&P downgrade of U.S. sovereign debt.

Ken Rogoff is back with me again. He's a professor at Harvard University and former chief economist for the International Monetary Fund. On the phone is Mohamed El-Erian, he is the CEO of PIMCO, one of the biggest bond dealers in the entire world. They run the biggest bond fund in the entire world.

Mohamed, thanks for being with us. I just spoke to David Beers of S&P. I want to get a sense from you, because it is a question a lot of our viewers who may not be involved in the world of bonds and bond ratings, ask me, after what happened in the financial crisis in 2008 and the errors that the major bond rating agencies made, do serious bond buyers and sellers and traders listen to what S&P says? Does this matter?

MOHAMED EL-ERIAN, CEO, PIMCO: It does matter, Ali, but not because we invest on the basis of what the rating agencies say. Here at PIMCO, we have our own sovereign credit assessment. We have our own internal ratings. And we make investment decisions based on our own work.

However, the rating agencies, who are a record ratings monopoly, are wired into the system. And they are wired into such a way as it gives them enormous influence. So they are reflected in investment guidelines. They are reflected in the way certain people think about risk. And, therefore, we have to pay attention to what other people are going to do based on this downgrade.

So strictly speaking, it will not impact how we invest our money, but it does impact how the system responds.

VELSHI: It may impact how other people invest. And that will be important to you.

Let's take a look. I want to put up a list on our screen of the 15 countries -- used to be 16 by the way, until yesterday -- the 15 countries that enjoy a AAA credit rating from both Moody's and S&P. The United States is no longer on that list. But Australia is, Canada is.

Mohamed, these countries pay better yields. Is there some reason why they wouldn't benefit dramatically from this downgrade in U.S. bonds?

EL-ERIAN: They will benefit. But it's not going to be dramatic. The U.S. had two thing going for it in addition to being the AAA. It is the reserve currency, so other countries use the dollar. And secondly, it has the deepest and most liquid financial markets, which means other countries outsource their hard-earned savings to be intermediated through the U.S. system.

Now none of these other countries on your list is either able or willing to step in for the U.S. They can do something at the margin, but they cannot replace the U.S. That's both the good news and the bad news. It is the good news which means the system will not change radically overnight. Because you cannot replace something with nothing. But it is also bad news because there is an uncertain element to how a global system operates with the AA as a score.

VELSHI: So given how plugged in you are to the system, and I just want to remind our viewers who may not be familiar with this, but the international bond market is substantially bigger than the capitalization of the value of the international stock markets. After being whip-sawed this week, Mohamed, many of our viewers were wondering, oh, my god, what happens next week? In the broadest economic sense-I know you are not a stock market prognosticator-but in the broader economic sense, will we wake up Monday with some massive response and reaction to what S&P did on Friday? Or was this, in some quarters, expected enough that the response will be muted?

EL-ERIAN: It was expected in some quarters, but it will also come as a shock in others. We're looking at an uncertain and volatile outlook. Certain things I think we know. We know that this is bad news for the U.S. economy. It is a further headwind to growth and job creation. We know that this is going to accelerate lots of questions about the rating agencies themselves. You'll hear the question, who rates the rating agencies? We know that it will put a question mark on other AAA countries, which means there will be concern about Europe. So which ever way you look it a, the risk premium in the market is going to go up. And this was unthinkable, Ali, not so long ago.

VELSHI: David Beers said it could take-if everything is done the right way and in fact if these budget discussions get a little more aggressive about either raising revenue, raising taxes or cutting spending, the U.S. could regain its AAA credit rating in about two years.

You know, the credit rating is not the same as lowering or raising interest rates themselves, Mohamed. And what we saw is that U.S. bonds got more expensive and their yields got lower. Their return got lower. That's counter intuitive to some people. You could expect that this kind of thing would cause U.S. bonds to-would cause the U.S. to have to pay more interest to borrow money. Why is that not happening?

EL-ERIAN: Two issues: First on the S&P, they added insult to injury because they didn't just downgrade the U.S. from AAA to AA plus. They put the new rating on negative outlook, which means they're still worried about the possibility, not the probability, but the possibility of a further downgrade.

In terms of the impact on U.S. Treasuries, remember U.S. Treasuries reflect a whole host of factors. What has dominated in recent times are two things. First, a recognition that the U.S. and the global economy are slowing down significantly. And that tends to push bond prices up, yields down. And second, we've had a fight to quality out of Europe because of the crisis there. And out of the stock market because of nine sharp days of decline. So the bond market is trying to reflect so many moving pieces. And net-net these two that I've just cited have dominated over the credit risk which was associated with the AAA downgrade.

VELSHI: And Mohamed, finally, I want to ask you, do you think there is going to be, maybe not on Monday, maybe not in the short term, but what's the overall effect, both psychologically and financially on the delicate economy here in the U.S. of not only this, which happened on Friday, but of the things we've seen unfold over the course of the last nine days. The debt deal, the new numbers on GDP which shows our growth is slower than expected, that manufacturing is slowing a little bit. That demand, the consumer demand had slowed a little bit and our job growth is actually a little better than we expected. When you put all of this into a bowl, what kind of bake do you bake out this?

EL-ERIAN: Let me tell you my expectation and then my hope. My expectation is when you put thought in a bowl, the analysts will be revising down again the growth estimates for the U.S. and for the rest of the world. And that is not good news for a country that already has an unemployment crisis, and has a housing market that is not functioning properly. This is bad news for Americans, because it means lower growth and fewer jobs.

My hope, Ali, and it is a hope, is that this will be a wake-up call for the politicians and the policy makers. This could be our Sputnik moment. The moment in which our psyche, as a country, is shaken so much, that we recognize collectively the need for common vision and common purpose to put this country back on the road to faster growth and more jobs.

VELSHI: Mohamed El-Erian, very clear, I appreciate you coming here and making some sense for us. Mohamed El-Erian is the CEO and co- chief investment officer at PIMCO.

I'm standing by with Ken Rogoff, he is the former chief economist of the International Monetary Fund. He is a Harvard professor and one of the smartest guys I know. He will help make sense of this, right after our commercial break. You're watching a live special edition of YOUR MONEY. Stay with us.

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VELSHI: You're watching a special five edition of YOUR MONEY where we're digging into why Standard & Poors downgraded the United States.

I'm joined again by Ken Rogoff, he is a Harvard economist and professor, and he is the former chief economist of the International Monetary Fund.

Even my head is spinning after this last week, Ken. A week ago we were talking about this debt deal. We were talking about GDP numbers and a manufacturing numbers and consumer demand, a market that dropped several percent and jobless numbers and now this downgrade. About eight months worth of news in one week.

Tell me what my viewers are supposed to think about thing that has happened, culminating in this down grade.

KEN ROGOFF, FMR. CHIEF ECONOMIST, IMF: The downgrade is certainly a kick in the seat of the pants for the United States. We're out there trying to market $15 trillion in debt and somebody says, well, it's good, but it's not great. It's not helpful.

Certainly the U.S. economy has been slowing. Europe is in trouble. And I just, I'm afraid there is no other way to put it, this is certainly a little bit of a scary moment. And we need leadership. We need our policy makers to come forward. Our monetary policy, especially, and do something. The market, the investors are looking for some leadership that has been absent. We saw the debate in Washington. That wasn't very encouraging. The Europeans don't seem to know what they're doing. They really have to pull it together. It is a critical moment. It is not a cheery message, but I'm afraid that's where we are.

VELSHI: That's the message. It is time for leadership. Ken Rogoff, thanks for helping make that clear for us. Ken Rogoff is a professor at Harvard University. You are watching a special live edition of YOUR MONEY. Thanks for joining us.